The Centre for European Reform is a think-tank devoted to improving the quality of the debate on the European Union. It is a forum for people with ideas from Britain and across the continent to discuss the many political, economic and social challenges facing Europe. It seeks to work with similar bodies in other European countries, North America and elsewhere in the world.

Wednesday, March 25, 2015

The ideas of Karl Marx suggest that Britain’s general election will not define the country's relationship with the EU.

It is tempting to see the British general election, to be held on May 7th, as a pivotal moment in Britain’s relationship with the EU. If the Conservatives form a government, there will be a referendum on Britain’s EU membership by the end of 2017. If Labour does so, there will not. At the time of writing, the election is impossible to call, with both parties neck and neck in the polls, but neither likely to win enough seats for an outright majority.

Karl Marx’s theory of history should lead us to the opposite conclusion, however: that the election will determine nothing. “The mode of production of material life,” he wrote, “conditions the general process of social, political and intellectual life”: economic developments give rise to politics, not the other way round. And economics will determine the politics of Britain’s relationship with the EU.

The underlying problem is the eurozone, but not, as many argue, because it is more dirigiste than the UK. Those who believe that the Continent loves red tape have not noticed that, on average, eurozone member-states’ propensity to regulate their economies is now only slightly stronger than the UK’s, as measured by OECD indicators. The Juncker Commission’s agenda, which seeks to further integrate the supply side of the European economy, could have been written in Westminster (the absence of meaningful services liberalisation aside). Rather, the problem has been the eurozone’s macroeconomic policies since the crisis began in 2008, which derailed Britain’s hopes for an export-led recovery.

The eurozone’s crisis response was this: the periphery would regain competitiveness through falls in real wages by way of a prolonged period of high unemployment. This would not have been too harmful to British exports had the core provided an offsetting boost to eurozone consumption, but the periphery shouldered the burden alone. Monetary policy was kept tight, partly because the European Central Bank forecast that the economy would rebound and partly because quantitative easing was too difficult politically, at least until every other tool had been tried. The result: eurozone demand was so weakened that the value of British exports to the eurozone fell by 11 per cent in real terms from their peak in 2006 to 2013. The UK’s current account deficit ballooned to 4.4 per cent of GDP in 2014, even as British exports to the rest of the world grew quickly. The IMF forecasts the eurozone’s trend rate growth to be 1.6 per cent a year – far lower than the rest of the world. The consequence: Britain will continue the slow process of decoupling from the rest of Europe.

The idea that the opposed interests of capitalists and labour drives social change – and hence politics – was central to Marx’s theory. This is also pertinent to the ‘Brexit’ question. Business is largely in favour of staying in the EU, since investors hate uncertainty and they rightly fret about diminished access to the single market after withdrawal. Meanwhile, people who have less capital, either of the financial or human kind, are more fearful of the greater competition that arises from immigration and international trade.

Immigration from the EU to Britain is likely to remain high in the next few years, as unemployment will only fall slowly in many eurozone countries, and Italian and Spanish workers will continue to move to Britain in search of work. It is almost certain that the UK economy will grow faster than the eurozone, and its flexible labour market is easily capable of absorbing the current rate of immigration from the EU. But British workers are increasingly hostile to immigration, and, despite liberals’ best efforts to convince them that it is beneficial, this will make them more antagonistic to the EU.

Capitalists, on the other hand, see poor prospects for investment in the rest of Europe. While they are unlikely to want the costs of trade and investment with rich countries on Britain’s doorstep to rise, even as Britain’s economic ties with Europe become less important, their enthusiasm for the Union will wane. The current pro-membership coalition of multinational firms, half of the Conservative party, Labour and most of the smaller parties, bar UKIP, will weaken unless the eurozone becomes a faster-growing place. Big business will not become eurosceptic. But as Britain’s decoupling progresses, business will become less willing to forcefully challenge a future Conservative government that favours EU withdrawal.

If the Conservatives lose the election, the price of becoming next Tory leader might be to offer a more radical EU policy than Cameron’s. To win the leadership, candidates might be forced to demand a more drastic renegotiation than Cameron’s moderate set of reforms, or even promise to campaign to leave the EU in a referendum. Conservative party members are more eurosceptic than its MPs, and they get to decide who becomes leader if more than one candidate stands. And when the Conservatives next win a parliamentary majority the pro-European coalition will have been weakened by slow eurozone growth, and continued neurosis about immigration.

There is a glimmer of hope for pro-Europeans. Marx’s great mistake was to fail to consider that governments would establish welfare states, as well as public education, health, and progressive taxation systems to prevent inequality from destroying the capitalist order. So far, in times of crisis, the eurozone’s leaders have done just enough to hold the bloc together. It will probably require another recession to force them to tackle the currency union’s design flaws. And unless the eurozone overcomes its problems, the risk of ‘Brexit’ can only grow.

John Springford is a senior research fellow at the Centre for European Reform.

Wednesday, March 04, 2015

David Cameron is receiving a lot of advice on how to ‘renegotiate’ the terms of Britain’s EU membership, if he wins May’s general election. Janan Ganesh’s recent Open Europe essay, ‘From a reluctant European: a memo to the prime minister’, is an excellent contribution to this debate. However, Ganesh mistakenly urges Cameron to seek UK opt-outs from EU social policy and financial regulation, neither of which is feasible, and he misreads the German position on some key dossiers.

The paper starts with a strong analysis of why the alternatives to full EU membership are pretty hopeless. Ganesh realises that a UK seeking to leave the EU would be in a weaker position to negotiate access to the single market than many Conservatives imagine. If the British followed the Norwegian or Swiss models, they would have to accept most EU regulations, the free movement of labour and the obligation to make big payments into the EU budget. The UK is much more dependent on the EU’s market than vice versa: Britain’s exports to the EU account for 14 per cent of its GDP, while the rest of the EU exports only 2.5 per cent of its GDP to Britain. As Ganesh says, “Our working assumption must be that the EU would go out of its way to make life for a departing member as difficult as possible, pour encourager les autres”.

He also points out that the British economy has thrived inside the EU and that its rules cannot therefore be too awful. He sees Britain as playing a similar role in the EU to that played by California in the US, as “the place where young and able people converge to make money or breathe freer air”.

A hard-headed realist, Ganesh argues that Cameron should – as many eurosceptics insist – threaten to campaign for withdrawal if he does not get what he wants in a renegotiation. It is possible that such threats could achieve more than a softer approach. But it is more likely that – by grating against the EU’s culture of compromise and consensus – they would alienate the allies that Cameron will need if he wishes to reform the EU.

One piece of good advice is that Cameron should drop the idea of deleting “ever closer union” from the EU treaties. “The EU is integrationist because its members want it to be, not because a legal clause mandates it”. He is also probably right to urge the prime minister to concentrate on policies, rather than institutions, since it would be easier to reform the former. So he tells Cameron not to focus on the European Court of Human Rights, the complexities of Justice and Home Affairs or the role of national parliaments, but rather on migration, the City and social policy.

Limiting the welfare benefits available to EU migrants will inevitably – given the political context in the UK – be one of Cameron’s chief demands. Ganesh rightly points to the benefits of migration and urges Cameron to keep his demands modest. Then Cameron would probably find allies, notably among North European governments, for reforming EU rules.

As for protecting the City from EU regulation, Ganesh is correct that there is a potential problem. Though it accounts for more than 60 per cent of the EU’s net financial services exports, the UK has only 12 per cent of the votes in the Council of Ministers. Countries that know very little about finance could theoretically gang up to impose rules on the City.

Ganesh therefore urges Cameron to demand an ‘emergency brake’ procedure for financial regulation: a government that had lost a vote could refer a matter of vital importance to the European Council, which operates by unanimity. Unless the brake is time-limited, the government applying it has a de facto veto.

The problem with this idea is that special pleading for the City is not popular with other governments, especially Berlin. The Germans remember the summit of December 2011 with horror: they had hoped that EU leaders would agree on a small treaty to strengthen fiscal discipline. But at the last minute Cameron came up with a set of demands as the price for his signature, some of which would have changed voting procedures on rules affecting the City. Angela Merkel was not prepared to tolerate what she saw as an attempt to opt out of part of the single market, lest others attempt their own carve-outs. The ‘fiscal compact’ went ahead without the British, as a non-EU treaty, and the Germans remain adamantly opposed to City opt-outs.

Ganesh argues that, since France has a de facto veto on agricultural questions, Britain should have one on the City. But he exaggerates France’s privileged position on agriculture. True, France is seldom outvoted. But that is because France is almost never isolated. It works hard to build alliances with other countries that share its views on the Common Agricultural Policy, such as Spain, Romania, Ireland and Poland.

In any case, Britain’s partners have almost always respected its sensitivities on City regulation. Thus in December 2012, the Council of Ministers agreed that decisions in the European Banking Authority should be taken by a ‘double majority’ system – requiring a majority of both euro and non-euro members to vote in favour. It is extremely rare for the UK to be outvoted on financial regulation: the one high-profile case was in March 2013, when the European Parliament had added limits on bankers’ bonuses to a directive on capital requirements, and Britain’s attempt to overturn the limits was defeated 26-1. (The UK also lost a more technical vote in 2012, when the Council gave the European Securities and Markets Authority the power to ban short-selling in an emergency.)

One key British concern has been the European Central Bank’s ‘location policy’. Four years ago the ECB stated that clearing houses dealing with euro-denominated financial instruments should be situated in the eurozone. The UK complained to the European Court of Justice that this policy breached the principles of the single market and won its case on March 4th.

Rather than seek a privileged status for the City, Britain should focus on the broader relationship between the single market – including financial regulation – and the eurozone. There is a risk that if the eurozone countries started to caucus on single market issues, they could turn up at the Council of Ministers and impose their views on the 28. This has not happened yet, and is highly unlikely, given the wide range of economic philosophies that divides the eurozone. But it could happen one day and the UK has a legitimate interest in trying to prevent such caucusing.

If the UK proposed protecting the single market, rather than, as Ganesh suggests, simply the City, it would find allies among ‘euro-outs’ such as Poland, Sweden and Denmark, eurozone countries that are economically liberal such as Ireland, Finland and (on a good day) Germany, and the European Commission (which wants to prevent the eurozone building its own institutions).

The UK should ask for euro-outs to be allowed to send observers into eurozone discussions (see Chapter 1.6 of our ‘How to build a modern EU’). And then, if and when the treaties are changed, the UK could ask for an article specifying that nothing done by the eurozone should damage the single market. It could also request a specific procedure that would allow a government to use an emergency brake, if it believed that a eurozone decision harmed the market. But the brake would have to be time-limited, to say a year, in order to be acceptable to other governments. And there may be a case for amending the treaties to facilitate the extension of double majority voting on sensitive issues.

Ganesh’s other major demand, that Cameron should claim an opt-out from European social policy, is unattainable – and even if achieved would make very little difference to British workers. Almost all labour market law in the EU is national, which is why the rules are so varied across the Union. There have been only a few significant EU social measures – covering areas such as working time, agency workers, maternity leave and non-discrimination. There are no more on the way because most member-states (France being an exception) do not want more social measures. The OECD’s employment protection indicators show that Britain has amongst the least regulated labour markets of all its members, comparable to Canada, the US and New Zealand (see Chapter 2 of our ‘The economic consequences of leaving the EU’. Even the Confederation of British Industry does not claim that EU labour laws are a significant problem for the UK economy.

Although British workers are allowed to opt out of most of its provisions, the working time directive – and the associated rulings of the ECJ – did create problems for the National Health Service. But the NHS has now adapted to the 48-hour working week and the ECJ’s definitions of rest periods. Many of its managers and younger doctors would not want to change the rules (see our ‘The working time directive: What’s the fuss about?’.

Britain’s partners would almost certainly not concede it an opt-out from EU social policy. Although John Major won such an opt-out in 1991, the circumstances were very different then: everyone else needed British consent for the Maastricht treaty that would establish the euro, so he was in a strong position. These days many member-states, and not only France, would be virulently opposed to any opt-out that – in their view – would allow an ‘ultra-liberal’ Britain to attract investment ‘unfairly’ by undercutting their social standards.

In the past few years Cameron has talked much less about the evils of European social policy, perhaps because he realises that this is a straw man. He probably understands that any attempt to repeal the principle of the 48-hour working week and the guarantee of four weeks’ paid holiday a year would be unpopular with British voters. He may also see that in a referendum campaign, many trade unions would refuse to campaign to keep Britain in the EU if the renegotiation had taken the country out of social policy.

Having laid out his three priorities, Ganesh has some other suggestions for Cameron, including shrinking the EU’s budget by excluding richer countries from its structural funds, and extending the single market in services. Both ideas are sensible. But when Gordon Brown proposed the former he did not get far, because many richer countries, and most notably Germany, did not want their poorer regions to lose access to EU funds. In any case, reopening the ‘multi-annual financial framework’, which set EU budget rules for the period 2014-20, would require unanimity and is therefore very unlikely.

The Germans have also long been the blockers – alongside France, Austria and Luxembourg – of the liberalisation of general services. So the British government cannot pursue this objective without developing a strategy for overcoming German opposition. For example, it could team up with other economically liberal governments and propose initially to deregulate those services in which Germany’s vested interests are weaker, such as construction and health.

Ganesh’s paper would have been stronger if it had taken more account of German preferences. For example, he buys the view that one often hears at the top of the British government, that Cameron has a good chance of forging agreement on a new EU treaty before a 2017 referendum. He quotes Wolfgang Schäuble, Germany’s finance minister, on the need for a new treaty. But Schäuble is often isolated in Berlin debates on this issue. The view in the chancellery is that in the long run some modest treaty changes would be desirable, to strengthen eurozone governance, but that they are not urgent and now is not the time. One reason for this reticence is the dire state of Franco-German relations: there is not enough trust between Paris and Berlin for them to come together and agree on the next steps on eurozone integration. As for the other 26 governments, none of them wants a new treaty.

Many of the reforms that Ganesh proposes would require treaty change. But the best that Cameron could hope to achieve by 2017 would be a political agreement in the European Council to change the treaties at some point in the future. Cameron’s problem is that many eurosceptics will not find promises of future EU reform convincing.

Ganesh concludes his essay with some strong geopolitical arguments for the UK to remain in the EU. He believes that the liberal Western order faces many threats, and not only from Vladimir Putin, and that the EU is a bulwark against them. He argues, rightly, that the case for closer collaboration on EU foreign and defence policy – areas where Britain would often lead – is a strong one. Let us hope many Conservatives read this stimulating essay.